SET AND SETTING describes the physical, mental, social and environmental context than an individual brings into a psychedelic experience. The phrase is credited to Timothy Leary, who popularized psychedelic use in the 1960's.
Set, as in "mindset" refers to the mental state a person brings to the experience, like thoughts, desires, feelings, general mood, and any preconceived notions or expectations about what they are about to experience. The current physical state of the body is also an important part of one's "set"; if one feels sick, injured, or generally unhealthy these sensations may get amplified during the trip.
Setting refers to the physical and social environment that the trip takes place in. It is able to guide or influence the course of the experience on both conscious and subconscious levels. Since psychedelics often enhance the emotions or mood one is currently feeling, stress, fear, or anxiety due to an unfamiliar, uncontrollable or otherwise disagreeable environment may result in an unpleasant or dangerous experience, that may be inconsistent with the experiences one may have had in the past (even with the same dose of the same substance). Conversely, an environment that provides a sense of safety, familiarity, control, and comfort is more likely to result in a pleasant experience.